The final countdown

William Wastie and Jane Amphlett explain how partners will be affected by the new age regulations, and what companies need to do now.

Discrimination legislation and its effect on partnerships, limited partnerships and limited liability partnerships (eg, law firms, accountancy firms and surveyors) has always been something of a confused and contradictory area. Nowhere is this now more apparent than under the new Employment Equality (Age) Regulations 2006 (regulations), due to come into force on 1 October 2006.

Partnerships are commonly used by small businesses and, until recently, by most professional firms. Since April 2001, there has been a new limited liability partnership (LLP), which combines the tax and flexibility of the traditional partnership, but with limited liability. The LLP is becoming the vehicle of choice for many professional firms and other businesses.

The consequences of applying the regulations (which adopt the European Equal Treatment Framework Directive 2000/78/EC) will be widespread. It is not the function of the age discrimination laws to respect agreements freely entered into by partners (or members) as a fair and private contractual bargain between themselves. Organisations may not contract to discriminate. In many firms, the regulations mean a complete culture change: for example, generally, the average retirement age for partners in top city law firms is currently only 62, and many top city firms have few partners aged 55 or over.

So what should firms be thinking about now to prepare for the regulations?

The regulations prohibit the victimisation or harassment of partners or members on the basis of age. However, the main provisions that firms need to understand are those prohibiting both ‘direct’ and ‘indirect’ discrimination.

Direct discrimination is where an individual is treated less favourably on the grounds of their age (whether actual or perceived). For example, where a firm imposes age limits for the recruitment or promotion of partners or the compulsory retirement of partners at a specific age.

Indirect discrimination can arise where a specific provision, criterion or practice (which may be applied equally to all the partners of the firm) puts individuals of a certain age group at a disadvantage. A firm’s lockstep profit-sharing structure (where individual profit shares move up and occasionally down, according to length of service) may indirectly discriminate against younger partners, or against older partners who take a reduced share of the firm’s profits in their final years of service. Other examples might be a requirement that all persons who are to be considered for admission to the partnership have a certain number of years’ post-qualification experience, or the closing of annuity rights to newly appointed partners.

Justification

Firms will be able to justify both direct and indirect discrimination if they can show that the relevant provision or practice can be justified as being a proportionate means of achieving a legitimate aim. No legitimate aims are laid down in the regulations, but the DTI has emphasised that it will not be easy to meet the requirement to show a legitimate aim and that, while economic factors, such as business needs and considerations of efficiency, may be legitimate aims, cost alone will not be sufficient.

The concept of proportionality will require an objective balancing exercise. The discriminatory effect must be weighed against its legitimate aim and be no more than is necessary for achieving the legitimate aim. A firm will also need to demonstrate that there were no less discriminatory ways of achieving the same aim.

So, if you want to rely on justification, you will need to obtain evidence. Start monitoring now, if you have not done so already.Claims by individual partners or members will be heard by tribunals. However, experience shows that tribunals are often not familiar with the concepts of ownership which being a partner (or member) represents, or the principles of equity or fiduciary duties, which, outside the contractual partnership or members’ agreement, govern the partnership relationship.

The level of damages that an individual may be able to claim for acts of age discrimination will be unlimited, based on financial loss and injury to feelings. Firms may be required to complete questionnaires in the face of a claim which could then be used as evidence in the tribunal. The regulations will override alternative dispute provisions in the partnership or members’ agreement.

Specific issues

A number of common partnership or membership provisions may potentially fall foul of the regulations.

One of the inconsistencies of the regulations as they apply to partnerships and LLPs is that, unlike the position for employees, no default retirement age has been set. This means any retirement age provision is potentially discriminatory, and firms will either have to justify a retirement age, which is likely to be difficult, or rely on other reasons, such as lack of capability to expel older partners.

Justification of retirement of a partner will need to be based on performance rather than age.

It had been suggested that lockstep arrangements should be exempted from the regulations, as they are arrangements specific to the owners of the goodwill of the firm that reward loyalty and enable succession planning. Although the government has not been persuaded by these arguments, the regulations do provide an exception for the provision of certain benefits, like lockstep arrangements, based on length of service.

There is a complete exemption for up to five years’ service, and this time can be assessed either by reference to the total length of service, or the length of time the partner/member has been doing work which the firm “reasonably considers” to be “at or above a particular level” by reference to the demands of the job. So, if the effort, skills or decision making are different for different categories of partners’/members’ length of service, benefits awarded for the first five years to any such level are exempt.

Where the length of service exceeds five years, it must reasonably appear to the firm that the manner in which it uses the criterion of length of service “fulfils a business need” (for example, by encouraging loyalty or motivation or rewarding experience).

If arrangements do not fall within this exemption, you will need to objectively justify them.

There are also specific exemptions in the regulations for the age requirements of occupational pension schemes. It may be that partnership or LLP annuity provisions which are only applicable on reaching a certain age or which are closed to the younger generation of partners can rely on the principles behind this exemption in arguing justification, but this is untested territory.

Where recruitment or promotion of partners is predicated on length of post-qualification experience, firms will be at risk of exposing themselves to claims from individuals who do not fulfil the required criteria. Firms will have to assess their appointment procedures solely on merit and widen their trainee recruitment process outside the traditional ‘milk round’ of universities and law schools.

Where organisations penalise partners for retiring before their ‘normal retirement date’ by the use of ‘good leaver’ and ‘bad leaver’ clauses, which can delay repayment of capital or the terms of any indemnity given by the firm, then these arrangements will need to be reassessed.

Next steps

Firms need to assess the impact of the regulations on their internal procedures and practices as well as set out their legitimate aims and highlight areas for reform. The argument that the partners or members have established procedures which have served them well for years and were privately negotiated between them will not be respected if they can be shown to discriminate. It will also be essential to train all partners/members and all employees (for whose actions the firm will be liable) to ensure that their practices are not discriminatory: this will involve a change in mindset for many.

William Wastie, partner specialising in partnership issues, and Jane Amphlett, partner in the discrimination unit at Addleshaw Goddard

What firms need to do now

Audit practices and procedures.

Monitor/obtain evidence to justify practices that affect particular age groups.